George Morgan's Blog, page 14

Index Records

It is fair to say that most investors don’t devote the time and effort necessary to adjust their portfolios for inflation, but its impact cannot be totally ignored. An annual inflation of 2.4% a year becomes 38% in just 14 years. If the price of a stock goes up and inflation increases by the same amount, there is no net increase in purchasing power. The Dow has returned to an inflation adjusted record after bear market just four times since 1899. The first came on December 29, 1905 after whic...

Index Research

It makes sense that an index investor would spend time and effort researching the major market indexes in order to understand how they are constructed and thus, how they work. I plan to devote the next few days to the subject in order to bring us both up to date. These lessons may also provide us insight on how smart beta may or may not operate. On Friday, the Dow Jones Industrial Average closed at 16,064, which is an all-time high. However, in order to reach an all-time inflation adjusted hi...

Good Advice

When I started reading this week’s edition of the Intelligent Investor, I thought Mr. Zweig was predicting that the market is about to crash. He is right, the probability that the Dow will go from 16,000 to 25,000 without a pullback is zero to none. But, that is not the point of the article. The point is, when it does will you be willing and able to bear the paper losses. What you did during the 2008 and 2009 subprime crisis is a good indication of what you will do when it happens again. If y...

Dow 16,000

So where do we go from here?  You can always find critics who see the glass half empty and are predicting that our woes will untimely end in a market crash. If you look at the long term history of the market, the number of crashes is extremely rare and is the result of some other major catastrophe in the economy. At the present time, there is no evidence of a pending crisis. Markets do however, occasionally experience what economists and market professionals call a correction. A correcti...

Smart Beta And The Individual Investor

When I was a stock broker, I ran across a lot of what I call “Omaha portfolios.” These were portfolios that contained anywhere from 20 to 40 different stock positions and most of them had been in existence for decades. The owners were typically in their fifties and sixties. The stocks they contained were all in the S&P 500 and most of them at the upper range in terms of their market cap. Almost no research went into the stock selection, rather most companies were chosen just because they...

Smart Beta On Wall Street

So far, most of what I have read about smart beta strategies is focused on funds being manufactured by Wall Street. The amount of money going into smart beta funds and ETFs is presently quite small. Morningstar identifies 163 ETFs which are based on a smart beta strategy and just a handful of open-ended mutual funds. Currently, smart beta ETFs have $107 billion in assets, which is just 7% of the ETF universe and a very small dot on the face of the $13 trillion fund industry. Smart beta ETFs g...

Market Bubble?

With both the Dow in the S&P 500 hitting record highs, you are beginning to see sound bites about a bubble and a possible market collapse. The market might be a little pricey, but by all conventional measures it is not grossly overpriced. The earnings multiple on the broad market stands at 18, which by historical measures is by no means excessive. The forward multiple on the S&P 500 is only 15. There are critics who believe that the current market highs are being driven by the Fed’s Q...

Not Your Grandfather's NASDAQ

When the NASDAQ index was started in 1985, many of its components were high tech startup companies and a few no longer exist. As I have often stated, the stock market is not a static organism, rather its infrastructure and functionality is in a constant state of evolution. The same can be said of the NASDAQ index. In the years since its inception, the percentage of tech stocks has declined and the number of divided paying stocks has risen. Currently, 51 of the top 100 NASDAQ stocks, including...

Investors Knee Jerk

This morning’s edition of the Intelligent Investor begins by stating the obvious; the Federal Reserve, under its new chairperson Janet Yellen, will eventually reverse QE III and interest rates will begin to rise. Mr. Zweig then goes on to say that in order to protect themselves many investors are pouring money into bank loan funds that hold loans issued by commercial banks to companies. This is a typical case of “something is going to happen and we all know what that will do.” The conventiona...

Major Smart Beta Question

The calculation of the S&P 500 is based upon the market cap of its components. The Dow Jones Industrial Average is the oldest market index and it’s calculation is extremely unusual because it is a price weighted series. Because it is a price weighted series, it gives equal weight to equal dollar changes and thus high price stocks carry more weight than low price stocks. A 10% change in a $200 dollar stock will have a much larger as impact on the index than would a 10% change in a $20 stoc...